Ghetto Wifi

@TimHarford answers a reader's letter in his Financial Times Dear Economist column: "Why do cafes offer free wireless if I'm not allowed to use it?"

The reader complains about being politely asked to vacate a table at lunchtime, so that more paying customers could be accommodated. Should the coffee shop offer wireless internet access if it isn’t willing to accept the opportunity cost associated with it, rhetorically asks said reader?

As a matter of fact, the wireless is irrelevant. The problem of customers hogging tables for hours existed long before computers. The scarce resource (especially at lunchtime) is the table. (Especially the table next to an electricity socket.)

As Tim points out in his column, the lunchtime opportunity cost of letting someone take up a table for four is substantial, while the wireless access, cheap to provide at any time, is a side-issue. But Tim is more polite to his reader than the reader probably deserves, and he fails to point out the false premise in the question. Of course the customer is expected and encouraged to use the facilities of the cafe (table, wifi, toilets) as well as helping herself to milk and sugar. But there is an implicit notion of proportionality: you don't walk off with half a kilo of sugar; you are allowed to use the free wifi, but that's not an unrestricted right; and buying a single cup of coffee doesn't entitle you to sit there all day. (There is a similar dispute about the ethics of making Ghetto Latte.)

Even impoverished writers, who try to make a cup of coffee last as long as possible while writing the next Harry Potter, are aware that there are limits. JK Rowling herself says on her website "the best writing cafe ... has staff who don't glower at you if you sit there too long" (Places to Write). In other words, she doesn't think she has an automatic right to sit there too long, and she appreciates those cafes that tolerate her stretching the limits.

As a non-economist, I'd like to draw attention to two aspects of this. The first is the readiness of Tim and his readers to frame the consumption of coffee and wifi as an economic transaction. "I bought this coffee with free internet access, and I'm entitled to my economic rights." There is no sense of a social relationship between the cafe owner and the customer, or the idea that the customer might vacate the table at lunchtime before being asked, out of consideration for the cafe owner's ability to make a reasonable living.

The second is the irrelevant foregrounding of the wifi issue, suggesting that the reader wishes to see internet access as a primary economic issue. Perhaps this reader is one of those who would make a fetish out of net neutrality, and would see any restrictions on internet access (including this dastardly cafe owner denying me free and unlimited wifi) as a gross violation of some fundamental principle.


See also Ghetto Wifi 2 (June 2010), Ghetto Workspace (August 2025)

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In January 2014, a flurry of press stories about a radical new way of solving this problem. A cafe in East London (called Ziferblat) now offers free coffee, free biscuits and free wifi. You pay for the time - 3p per minute.


Sources: Ziferblat website, Daily Mail, Daily Telegraph, The Guardian, Time Out.

See also: @BBCNewsMagazine, The Etiquette of Coffee Shop Lounging (16 Jan 2014)

See also @BBCNewsMagazine, The generation dependent on the phone charger (15 March 2014)

Update 15 March 2014

Pay as you drive 3

Couple of posts from the Smart 421 people on usage-based car insurance.

• Telematics and retail insurance (aka “PAYD”)
• Usage based car insurance… why bother?

Their conclusion: it isn't going to save anyone enough money to justify the cost and inconvenience and to overcome the concern for privacy. Adoption only becomes viable when the devices become a commodity (multiple providers, standard interface, routinely fitted to new cars), with a strong carrot/stick from the government (e..g legislation or road charging).

This is pretty close to what I said when the Norwich Union experiment was abandoned last year (Pay as you drive 2). 

The Smart 421 bloggers also have some comparisons with Pay-As-You-Go models for other utilities, including domestic energy and water, and telecoms. Telecoms is clearly more complex than energy and water consumption, and has much more complicated pricing schemes. What are the lessons for software pricing - e.g. Anything-as-a-Service?

SaaS for the Pessimists

One of the critical success factors of SaaS is the paradox of confidence.

As I've pointed out here before, SaaS (Software-as-a-Service) helps you to manage your Service-Oriented Cashflow. By shifting from fixed costs upfront to variable costs later, you may be getting a cashflow advantage even if you end up paying more in total.

Now here's the thing about confidence. Optimists prefer fixed costs because they expect to get economies of scale; pessimists prefer variable costs because they fear they might not. So in an economic downturn, it makes sense for pessimists to shift a lot of expenditure to Pay-As-You-Go.

Some analysts are comparing SaaS (Software-as-a-Service) with ASP (application service provision). Although ASP had some notable successes, it wasn't anything like as commercially successful as its champions hoped. However, in times of credit crunch and pessimism, the cashflow arguments may be much more telling this time around.

Now here's the second thing about confidence. Pay-As-You-Go may improve the cashflow for the service consumer, but it typically causes cashflow problems for the service provider. So maybe only the most confident service providers - with the best technology and the most confident investors - can afford to offer services on a Pay-As-You-Go basis.

And here's the third thing about confidence. The consumer needs to be confident that the service provider is going to stick around. That means financial stability as well as technical stability. Does this mean it's the big companies who are going to make all the money from SaaS?

Microsoft certainly hopes that "Customers will write us bigger checks". See comment by Ed Brill (IBM), via Esther Schindler. But Microsoft can probably afford to wait for the cheques to roll in. Smaller companies will somehow have to find a way to finesse the cashflow.

Credit Crunch SOA - Outsourcing

One of a series of posts exploring how the current economic conditions are affecting the SOA world. What are the implications for organizations and individuals?

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Outsourcing

At the level of the individual deal/firm, there are clearly going to be some casualties. Obviously the organizations that are in meltdown, or whose funds are currently frozen in some Icelandic bank account, are not going to be spending money they haven't got and can't borrow. And some emergency take-overs in the banking sector are going to reduce the number of banking systems that need to be built and maintained.

But overall, the situation for the outsourcing might not look too bad. Business-as-usual requires systems-as-usual. Indeed, some people in the outsourcing world (for example Phil Morris of EquaTerra via ZDNet) are arguing that outsourcing is countercyclic - in other words, it goes up when the economy as a whole goes down - because it is cheaper and lower-risk than employing people yourself. (I don't remember anyone saying outsourcing was counter-cyclic when the economy was going up, but I must have missed it.)

But what kind of outsourcing is it going to be? Following Archilochus (via Isaiah Berlin and Jim Collins) we can identify two styles of outsourcing: the Fox makes lots of small outsourcing deals and the Hedgehog makes one big outsourcing deal.

Som Sarma of Satyam Computer Services is on the side of the Hedgehogs when he writes "As organisations are driven to focus on IT cost having a single supplier can minimise management, due diligence and supplier selection expenses." [ComputerWorldUK, 2 October 2008] He repeats (in almost identical words) a point made by Martyn Hart back in January who, while acknowledging that the past couple of years has seen a swing away from 'mega deal' towards multi-shoring and choosing separate suppliers for each process, predicted a swing back to the single supplier, arguing that this would provide better cost management. [ComputerWorldUK, 22 January 2008]

However, Som Sarma's colleague Deepak Kataria, speaking at the New Services Environment Summit in Dallas TX (February 2008), warned against over dependency on single vendor. He recommends defining and implementing a conceptual abstract framework for mapping the technology roadmap to multiple vendor platforms and future versions [see Deepak's presentation on SOA Transformation (ppt)].

I'm with Deepak on this point. If you have a first-class architecture (and I admit that is a big IF) you can get the best of both worlds - better governance and risk management, as well as better cost management. With SOA, organizations can choose to manage outsourcing at a finer level of granularity, in order to squeeze extra value from the network, as well as keeping closer control over their suppliers. As organizations develop more sophisticated service management capability, they can move from being a simple hedgehog (hand everything over to XYZ Global Services and hope for the best) to being a clever fox.

One data point here - reported anxiety at General Motors over the merger between HP and EDS, which means GM is now spending a third of its massive technology budget with a single supplier. [HP-EDS Combo makes General Motors uncomfortable].

Meanwhile, both Som and Martyn identify another critical benefit from outsourcing - a shift towards Pay-As-You-Go models. See my previous post on Service-Oriented CashFlow.

Service-Oriented CashFlow

In difficult economic times, the most important business measure for many firms is not profit or revenue growth or cost-saving but cashflow. Which means that the business case for SOA shifts away from relatively boring arguments about cost-saving (economics of scale), and strategic but highly imprecise arguments about flexibility (economics of scope), towards careful comparison of the dynamic economic viability of different business models (economics of governance alignment).

There aren't yet many SOA case studies that talk about cashflow. When I search for "service-oriented" and "cashflow", I keep finding references to a healthcare distribution company Owens & Minor, based in Mechanicsville VA, which started an 4-year SOA project sometime in 2005. (Speed Wins at Owens & Minor, Feb 2005) So nearly finished yet, chaps?

As I've explained in previous posts, the Pay-As-You-Go model has two advantages for the service consumer - better cashflow (because there is less financial latency between expenditure and return) and reduced risk (because you only spend as much as you need). As economic conditions become more volatile, and credit becomes more expensive, both of these advantages become more valuable.

Valuable for the consumer that is. The SaaS vendors (cheerleader Phil Wainewright) quite rightly see this as an opportunity for SaaS. But of course the challenge for the SaaS vendors is how to provide these benefits without themselves incurring excess cost and risk.

Billing and credit control are obviously key elements of the SaaS infrastructure, and some of Phil's clients offer useful services in this space. So are we moving towards a stratified SaaS world: (service-as-a-service)-as-a-service? And what are the economics of that?

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Phil Wainewright on CashFlow: A Few Financial Home Truths. For mechanisms for handling billing see Phil Wainewright on Easing the SaaS-to-cash cycle and Marco Seiriö (RuleCore) on More CEP SaaS Pain.

Note: for various reasons, we now prefer the term Economics of Alignment. 

Updated 25 October 2013

SOA and Web 2.0

Economic principles such as network effect and the long tail play a role in how Web 2.0 may impact your business.

Network Effect

• The value of a service in one place depends on the amount of usage elsewhere – the more the better.

• This is especially true of services that offer some form of communication – the value of the service depends partly on the number of other people you can communicate with.

• There is a positive feedback loop – as more people use the service, it may increase in value, thus persuading more people to use the service. This feedback loop may result in a rapid growth curve.

• This leads to the concept of critical mass – the level at which the growth curve becomes self-sustaining.

Long Tail

• The traditional Pareto principle (80% of the value comes from 20% of the cases) assumes a significant proportion of fixed costs. For example, a bricks-and-mortar bookshop must devote shelf space to any book in stock, and there is a cost associated with excess inventory.

• But in a service-based economy, it may be possible to alter the supply-side economics – for example shifting from fixed costs to variable costs – and this means that the rare items (both individually and in aggregate) could be as profitable as the popular items.

• The economic viability of the long tail depends critically on bringing down the fixed costs of servicing the long tail, and shifting to a more flexible variable-cost regime.

Web 2.0 and SOA together can help provide a cost-effective way of accessing these network effects and long-tail benefits.

• Cost reduction – leveraging existing systems through services, helping to cut cost of customization

• Cost mitigation – providing services not solutions, shifting responsibilities to collaborating partners. For example, customer self-service, small communities providing their own solutions. Thus collaboration helps spread the cost.

• Shift from fixed cost to variable cost – for example through “pay-as-you-go” on-demand pricing – thus helping to reduce the risk and the barriers to adoption.

At the same time, IT organizations are also often looking for ways to improve the delivery of solutions to their business users. Web 2.0 technologies and approaches may help reduce developer effort and time to solution, as well as providing more agile solutions that can be rapidly remixed and re-assembled to meet changing demands.

Challenges/concerns

In order to achieve these Web 2.0 benefits, there are some questions that need to be answered:

• What are the implications for IT management? How can I guarantee the continued security of my core systems? How can I provide the necessary quality of service to my existing users as well as the new ones?

• What are the implications for business management? How can I guarantee the continued integrity of my products and services? If third parties are able to mash my services with external services, how can I retain control of my brand and corporate image?

• What are the implications for corporate governance and compliance? Do these external arrangements introduce new risks?

Clearly many organizations will not be prepared to go ahead with Web 2.0 without good answers to questions like these. This is why it will be important to have a well-structured approach to Web 2.0 and SOA.

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This is an extract from an article Lawrence Wilkes and I wrote in February Extending SOA with Web 2.0. Commissioned by IBM and available free from the CBDI Forum website.

Pay As You Go

In a recent post, Dave Linthicum talked about the Pay As You Go Challenge, and describes the benefits of Pay-As-You-Go in terms of shifting the risk from the user to the provider. Instead of the user paying for something upfront, before even knowing whether something works (generally, or in that particular use-context), the user pays only if and when it works, and can cancel at any time.

This pay-as-you-go model applies to software-as-a-service of course, and Dave urges that SOA vendors should adopt this model for SOA platforms as well, in other words, something like platform-as-a-service.

But there is a more fundamental economic basis for the pay-as-you-go model, which Dave doesn't mention. As well as shifting risk, the model shifts the balance of costs for the user - from fixed costs to variable costs.

Put very simply, the user's total cost equals fixed cost plus variable cost. Variable cost increases with volume, while fixed costs stay the same. (If you want a more sophisticated explanation, ask a friendly accountant.) Now fixed costs are subject to the economics of scale. If the user has a business process with a significant proportion of fixed costs, then the average cost will go down as the volumes go up. In some cases, a fixed-cost business process may only be economically viable if a constantly high volume can be maintained. But with a variable-cost business process, the average cost is much less affected by volume, and it is possible for the process to remain economically viable across a much wider and perhaps fluctuating range. In other words, a variable-cost process is much more adaptable to changing levels of demand than a fixed-cost process.

And this is where SOA comes in. Under certain circumstances, SOA can support the shift from fixed-cost to variable cost, and therefore can release a whole set of benefits related to adaptability and economic viability - the so-called On-Demand Business.

But only under certain circumstances. The problem isn't with the technology; the problem is with the traditional structures of funding and cross-charging within a typical enterprise or ecosystem or marketplace, which can make it rather difficult to establish adequate pay-as-you-go mechanisms, especially if noone else is doing it yet.

Thus pay-as-you-go is generally more difficult than traditional funding and charging mechanisms. If you are just starting out on your SOA journey, it might make sense for you to defer these difficulties until you have developed some experience and capability in other areas.

And this is where an SOA Adoption Roadmap or Maturity Model comes in. The purpose of one of these is to help you work out which capabilities you need in order to achieve which classes of benefit, and to help you tackle the difficulties in an organized fashion.

Pay as you drive 2

Norwich Union has suspended its Pay-As-You-Drive insurance scheme [BBC News, 14 June 2008], announced here two years ago [Pay As You Drive]. I am disappointed at this news, because PAYD was my favourite example of differentiated pricing, using telematic information about driving patterns to determine the insurance premium paid by a driver.

This is not the end of differentiated pricing of course, and may not even be the end of PAYD. According to the BBC, there is one other insurance company in the UK (MoreTh>n) offering PAYD insurance, but all I could find on their website was a product called GreenWheels. This is not a PAYD insurance scheme, but uses similar technology to provide detailed information to the driver to help improve the driver's fuel and maintenance costs as well as safety.

Why did the Norwich Union scheme fail, and what does this tell us about the viability of such schemes in general? The primary reason is that the scheme failed to attract enough drivers to cover the fixed costs of administering the scheme. But in the longer term, a scheme like this was only going to be viable if the technology became cheaper and more widely available - in other words, compatible telematics devices fitted as standard to factory model automobiles. And this in turn was only going to happen if PAYD insurance was offered by several major insurance companies (perhaps across Europe rather than just in the UK, with appropriate "roaming charges" as with mobile phones) or if there was some other purpose for the technology and infrastructure. For example, providing information to support eco-friendly driving (Green Wheels). But the big opportunity was PAYD road pricing.

However PAYD road pricing is highly unpopular. There was a major campaign against PAYD road pricing in the UK, orchestrated by the road lobby. The UK government may have hoped that commercial PAYD products, including insurance, might have paved the way for PAYD road pricing, but this now looks less likely than ever.

Meanwhile, we already have some forms of road pricing. London already has a congestion charging scheme, and other cities are likely to follow. But these schemes, along with parking and traffic violations, are currently based on photographing the car plates, and this is of course vulnerable to identity theft. (You just need to put fake plates on your car, and someone else will get the penalty notice.)

At the core of PAYD needs to be a robust and reliable way of identifying vehicles and recording their behaviour, and this raises obvious privacy concerns. All differentiated service depends on an appropriate identity scheme, and such schemes are politically charged whenever governments get involved. So perhaps widespread adoption of differentiated service will have to wait until Identity 2.0 is more mature?

Ecosystem Advantage

Mark O'Neill (Vordel) discusses a couple of SOA projects with an interesting goal - causing your customers to use less of your products. This is not competitive advantage, at least not directly, it is an advantage for the ecosystem as a whole, which becomes more efficient, less wasteful.

Mark's examples are in the utility sector

• Gridwise - a US consortium of energy companies and technology companies
  
  • Pacific Northwest National Laboratory aims to empower utility customers (IBM April 2007)
  • How SOA could change the way you buy electricity (Network World, Oct 2007)

• EPAL - the Portuguese water board (one of Mark's own clients)

Similar thinking applies to the "pay-as-you-drive" concept in insurance, encouraging drivers to use (and pay for) less risk.

These schemes are potentially very attractive. There are three main challenges here.

• Identification - analyzing an ecosystem systematically to discover opportunities for creating or releasing additional value

• Mobilization - aligning the ecosystem to the new improved distribution of value - easier where there is a single powerful player or industry regulator that can drive and enforce (and perhaps fund) the initiative until it becomes self-sustaining, otherwise more difficult

• Ecosystem side-effects - working out satisfactory multilateral solutions to complications such as privacy and security

Related Posts: Pay as you drive (Oct 2006) (June 2008) (April 2009)

Pay As You Drive

Norwich Union has been experimenting with Pay-As-You-Drive insurance for a little while now, and has now made this service generally available to UK drivers, in association with technology company TrafficMaster, which provides the satellite navigation devices. [Norwich Union website, TrafficMaster website, BBC News report]

PAYD is an interesting application of the concept of differentiated context-aware services. Drivers pay a variable amount for car insurance, depending on the identity of the driver (under 23s pay more than older drivers) and the context (daytime versus nighttime, motorway versus town) as well as the number of miles driven.

This kind of differentiated service not only reduces the cost of insurance for some drivers, but also allows the driver a greater level of control over the insurance bill - by driving less. PAYD may also have a beneficial effect on road congestion and pollution.

However, although Norwich Union has evidently gone to some trouble to explain and manage the differences between regular insurance and PAYD, drivers adopting this kind of insurance will have to deal with some new complications, and I think we can expect the scheme to evolve further. For example, the arrangements for driving outside the UK seem unsatisfactory, and we may perhaps expect the emergence of the equivalent of "roaming charges" as insurers in other countries adopt similar or interoperable schemes.

Norwich Union has also gone to some trouble to deal with some of the security and privacy concerns of the scheme. The in-car device itself contains no data that can identify the driver or the vehicle. The data are encrypted for transmission, and then deleted from the in-car device. Not bad, although probably not perfect. (I haven't done a detailed analysis.)

However, the privacy issues are unlikely to deter many consumers. Context-aware services often involve some voluntary trade-off between privacy and consumer value. The consumer grants the service provider access to some personal information (such as consumption patterns), and gets some value in return (such as more precisely targetted special offers). PAYD is no different in that respect from any other scheme that permits the service provider (retailer, airline, credit card) to collect and process large quantities of consumer data.

It is going to be interesting to see the popularity of this kind of scheme, and the willingness of consumers to accept some level of complexity and strangeness, if they are convinced that this will give them a more cost-effective and (at least partially) user-controlled service.

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Related Posts

Pay As You Drive 2 (June 2008)
Pay As You Drive 3 (June 2009)

Value-Based Pricing

My recent commentary for the CBDI Forum on Service Economics has been picked up by a number of other industry analysts and commentators, including Britton Manasco (ZDNet), Phil Wainewright (Loosely Coupled) and Sadagopan. I am widely quoted as advocating output-based pricing.

I certainly believe that output-based pricing has some key advantages over input-based pricing, especially within a service economy. But there is a third option we have to consider - value-based pricing. So what's the difference?

Pricing	Definition	Payroll Example	Word Processing Example
Input-Based	The consumer pays for the components (or resources) that are required (or consumed) to implement and deliver the service - including hardware units, software units, support units, and so on. [Updated for clarity]	If you buy a payroll package to run on your own machine, you typically pay a licence fee to the software provider that might be related to the size of the machine, but not directly to the number of payroll transactions.	I buy a copy of Microsoft Word.
Output-Based	With output-based pricing, the consumer pays for the direct results of a service. This is what Phil is referring to when he says "customers buy access to the functionality the software provides".	If you buy payroll processing as a service, you typically pay for the number of payroll transactions, regardless of the quantity of hardware and software that is required to deliver this service.	I make a micropayment to Microsoft every time a save or print a document. (Oh, and I want a micropayment refund every time the software crashes.)
Value-Based	With value-based pricing, the consumer pays for the indirect consequences of a service. This is what Britton is talking about when he says "software companies will have to begin charging for – dare I say it — business results"	If you buy payroll processing as a business service, you might negotiate a contract that was based on the total financial value of the payroll, rather than the number of transactions.	I pay a percentage of my royalties to Microsoft every time I sell an article or report.

In a simple world, you might expect a simple linear relationship between input and output, and also between output and business value. Under these conditions, it wouldn't matter whether you had input-based pricing, output-based pricing or value-based pricing, because they would all be equivalent.

But in a complex and diverse world, these relationships are non-linear, possibly even chaotic. The price will be commensurate with the business value only if a value-based pricing scheme is in operation. Although this would seem to be a Good Thing, there seem to be all sorts of hesitations and resistances in practice. Service providers are wary of value-based pricing, because if the consumer does not properly embed the service into an effective business process, the consumer may never get any value from the service, and the service provider may never get paid. Consumers are wary of value-based pricing, because they fear that if they start to get huge amounts of value from a service, they will end up owing huge amounts to the service provider, which the service provider might not truly deserve.

For example, suppose you buy information about a stock price. If you subsequently use this information to speculate on the stock and make a million dollars, does this mean you should pay the information provider more than if you simply buy a few hundred shares to put into your long-term savings plan? What happens if you lose money on the stock - does the information provider share the risk? Value-based pricing makes some important assumptions about the nature of the relationship between the parties.

In 1987 I was working in Chicago, feeling a little homesick, watching British acts on American television. Tracey Ullman had her own weekly show, which included a cartoon interlude of a dysfunctional family. I am told that in return for granting airtime to this unknown cartoon, Ullman negotiated a small percentage for herself. The cartoon later expanded into a full show and Tracey Ullman is now a very wealthy woman. (Do you need me to tell you which cartoon it was? Doh!) That's value-based pricing.

Value-based pricing seems like a brilliant scheme for both sides. The supplier gets the possibility of unlimited revenue; the consumer only pays if he can afford it. But there is considerable resistance to this scheme as well. Consumers are reluctant to sign a blank cheque - there is a feeling that the windfall profits for the supplier (like Tracey Ullman's wealth) are in some sense undeserved. Meanwhile, suppliers may be suspicious of the calculation of value, especially if this is produced out of the consumer's accounting system.


Related posts Software Pricing (August 2005), Software Pricing at CA (September 2005)